“Someone is sitting in the shade today become someone planted a tree a long time ago.” Warren Buffett
Warren Buffett has been investing since he was 11 years old. Today, he’s worth over $117 billion. Even with such an early start, Buffett didn’t become a billionaire until he was over 50 years old. In fact, Buffett amassed over 99% of his wealth after he turned 50.
How did this happen? Yes, Buffett is a great investor, but that is only a partial explanation. More so than his investing skills, the amount of time he has spent investing is responsible for his net worth.
If you’re a young investor, the biggest lesson you should learn from Buffett is to use time and compound interest while you can.
With the right savings rate and enough time to let compound interest work its magic, you can set yourself up for financial freedom when you're older.
The problem is that most do this backwards. People have several immediate needs. Between student loans, rent/mortgage payments, food, car insurance, and having a social life, expenses pile up quickly.
Retirement in your 20s and 30s is so far out and can be challenging to comprehend. It’s several decades away, so it often gets pushed to the backburner.
I ran some scenarios to demonstrate the power of compound interest and the cost of waiting:
Jane learned about compound interest early and got a head start. She began saving $500/Month when she was 25.
Bob took longer and didn’t start saving until he was 35. By waiting 10 years longer than Jane, Bob has less than half of what Jane has when he retires. Notice that they both contributed the same amount and earned the same amount on their investments. The only difference is 10 years.
How much more would Bob have to invest every month to catch up to Jane?
The answer is more than double. Because he started later, Bob will have to contribute $1055/ Month to have as nearly as much as Jane when he retires.
What if Jane decides to stop saving at age 50 and just let her investments grow until retirement?
Even though Jane has 5 less years of savings, she ends up with more money in retirement because she started earlier than Bob.
If you’re young, learn from Jane. By investing 10% of your income every month (preferably 15%-20%) you can set yourself up to have a lot of options and freedom when you’re older.